How the German Economy is Withstanding the Global Slowdown

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How the German Economy is Withstanding the Global Slowdown

The ZEW Indicator of Economic Sentiment for Germany dropped by 2.7 today, representing a third decline in a row. But the drop was not as big as expected, and on the face of it, it is remarkable how well Germany fares amid the sovereign debt crisis:

Its public finances are kept admirably under control, its unemployment rate has fallen to the lowest level in decades, and the current construction boom will ensure work for months if not years to come. This is all the more interesting when you keep in mind that until 2010, Germany faced a savage recession.

But the economy has bounced back strongly. Two of the most successful measures taken by the government back then were Germany’s “cash for clunkers“ plan, which helped car parts suppliers and boosted sales, and the use of government subsidies that allowed companies to hold on to their workers until the order books fill up again.

The latter has been an established social legislation for decades. Instead of laying off personell, a company may reduce working hours and ask the government to offset a part of the costs. This incentive proved critical to containing unemployment and retaining skilled workers.

In general, the German labour system seems to be one of the secrets of its robust economy. Young Germans either pursue an academic degree or enroll in an apprenticeship scheme that combines further schooling and practical training on the job. As a result of the highly goal-oriented apprenticeship structure, youth unemployment is under 10 percent, one of the best in Europe.

Another reason for Germany’s success is the “Mittelstand”, the highly specialised small and midsized companies that are the backbone of its economy and that employ most of the country’s workfoce. Around 1,000 of these so-called “hidden champions” are global market leaders in their segment. Accordingly, the Mittelstand is also one of the driving forces behind Germany’s exporting power.

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